tag:blogger.com,1999:blog-8764541874043694159.post3386440984971358867..comments2024-03-28T12:23:39.665+00:00Comments on Coppola Comment: Sham guaranteeFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger43125tag:blogger.com,1999:blog-8764541874043694159.post-69546054542150160562013-03-25T20:48:54.497+00:002013-03-25T20:48:54.497+00:00SE Military bases, then. My bad.
Proux - I know...SE Military bases, then. My bad. <br /><br />Proux - I know the bases are UK sovereign territory. But the Cyprus govt claims them, of course. Hence my suggestion. Though the Cypriots would have to negotiate hard with the UK to get any title to those bases - national security always trumps territorial claims - and I'm not sure they have much to offer in return.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-16489623503389737712013-03-25T20:29:35.551+00:002013-03-25T20:29:35.551+00:00Neither of them are Naval Bases either. Dhekelia i...Neither of them are Naval Bases either. Dhekelia is landlocked and there aren't any significant piers either at Akrotiri or Episkopi. Surreptitious Evilhttp://www.surreptitiousevil.comnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-24262068526806909242013-03-23T21:43:10.080+00:002013-03-23T21:43:10.080+00:00Ralph, I put that qualifier in about deposit insur...Ralph, I put that qualifier in about deposit insurance because I do not believe in deposit insurance. However, I accept there is a valid argument in favour of deposit insurance. On balance, I believe deposit insurance offers depositors a sense of security that makes them lazy. Moreover, depositor disinterest in the safety of where they deposit their money leads banks to engage in unsafe levels of leverage. If it was up to me there would be no deposit insurance, but that is a minority view. The electorate like their implicit subsidies.Richardhttps://www.blogger.com/profile/07937606253138392580noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-27233995570526833882013-03-23T17:44:44.305+00:002013-03-23T17:44:44.305+00:00I don't see why the Cypriot government should ...I don't see why the Cypriot government should encumber itself with future liabilities to bail out some random bank creditors. There's no scenario where it is a good idea: if they stay in the euro, it's a liability, if they don't, they can as well print currency directly, banknotes always look prettier than bonds.<br /><br />It seems that the law voted yesterday is a much better idea: good/bad bank split, >100k creditors in the resolution queue. Basically they seem to be doing the right thing with inelegant timing (it would have been neater to have bank resolution law ready earlier than on day 5 after an actual operational bank failure...)<br />cighttp://commentisglee.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-17393540578379925482013-03-23T17:25:35.561+00:002013-03-23T17:25:35.561+00:00No, banks have generally no (or very little) money...No, banks have generally no (or very little) money. What the "levy" on deposits does is not to move cash from a giant pile of available cash to another -- there simply isn't such a pile -- but to simply truncate liabilities that are not matched by assets.<br /><br />Imagine you've lent £100 to a friend, and then, on the day they are due to repay you, they have only managed to collect £60. You deciding to forgive them and accept £60 instead of the full amount is the same operation as the deposit levy in Cyprus. Neither you nor your friend have the £40 you're forgiving.<br /><br />Banks are really social networking platforms that allow people to lend to each other. They only keep petty cash so when people who borrow fail to repay they have to fail the people who made the loans, or get some external entity to make a donation.cighttp://commentisglee.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-47301243241413392522013-03-23T16:48:52.698+00:002013-03-23T16:48:52.698+00:00Ralph
The ECB will protect its own balance sheet f...Ralph<br />The ECB will protect its own balance sheet first and foremost, if necessary by withholding customers' money. I repeat, it has NO mandate to protect depositors, however much you might like it to.<br />I am well aware of the problems in bank management. What I find naive is your apparent belief that politicians are trustworthy. I don't trust politicians any more, or less, than bankers.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-57646318808580253222013-03-23T11:07:44.176+00:002013-03-23T11:07:44.176+00:00Frances,
Re your claim that “The ECB has no manda...Frances,<br /><br />Re your claim that “The ECB has no mandate to protect customers from bank losses..” that point is of very limited relevance because it’s near impossible for commercial banks to fail under full reserve. Reason is that EITHER depositors’ money is lodged at the central bank, in which case it cannot be lost, OR it is loaned on, in which case the relevant depositors carry the risk, not the commercial bank. <br /><br />But if a commercial bank DID GO BUST, then I agree the ECB has no mandate to rescue it. But under full reserve, it WOULD HAVE an obligation to look after funds lodged by those who wanted their money to be 100% safe.<br /><br />Re your claim that my faith in government is “touchingly naïve” and your querie as to whether I have ever heard of political corruption, my response is that given the fact that commercial banks are run by spivs, criminals, fraudsters, etc who have been fined BILLIONS for their crimes, I find you faith in commercial banks equally naïve.<br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-91522608124926612922013-03-23T10:45:02.841+00:002013-03-23T10:45:02.841+00:00Richard,
You are quite right to say that full res...Richard,<br /><br />You are quite right to say that full reserve involves banks acting as vaults – at least that’s true for those depositors who want their money to be 100% safe. You then ask, “If there is such a demand for vault only banks why are people not setting them up?” The answer is simple: under the existing system, depositors can get the twin advantages of 100% safety (thanks to the taxpayer) plus the advantages of having their money put at risk, i.e. invested. I.e. if you can have your cake and eat it at the expense of the taxpayer, then you might as well go for that option. That’s why there is little demand for “vaults”.<br /><br />Next, you argue that because having somewhere to store your jewellery is not a human right, ergo having somewhere to story your money is not a basic human right. The two are entirely different: jewellery is a LUXURY. Money is an absolute ESSENTIAL – e.g. for buying food, etc.<br /><br />Next, you say “Deposit insurance is defensible if the bank is engaging in lending because the bank could end up illiquid or insolvent.” OK . . I can apply that argument to the Mafia: “state subsidies for the Mafia are defensible if the Mafia is engaged in lending because otherwise the Mafia could end up illiquid or insolvent.”<br /><br /><br />Ralph Musgravehttps://www.blogger.com/profile/09443857766263185665noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-66455376194155295802013-03-23T03:42:11.548+00:002013-03-23T03:42:11.548+00:00But putting the corporation into bankruptcy needn&...But putting the corporation into bankruptcy needn't shut them down. That's what really should have been done.<br />The shareholders get wiped out, the management turfed and the assets and liabilities unwound. The banks shuts on a Friday and opens Monday with new owners i.e. receivership.cringing2https://www.blogger.com/profile/07174637668885864648noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-79841121373029545422013-03-23T03:35:25.718+00:002013-03-23T03:35:25.718+00:00Nor is the ECB a central bank in real terms.Nor is the ECB a central bank in real terms.cringing2https://www.blogger.com/profile/07174637668885864648noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-5461165430771443882013-03-23T02:38:45.550+00:002013-03-23T02:38:45.550+00:00Hi Frances, I'm glad I found your blog comment...Hi Frances, I'm glad I found your blog commenting on the Cyprus crisis. And pardon me if I will sound completely CLUELESS in my coming question. I am still trying to wrap my head around the whole claim that Cyprus would go bankrupt and dead-ends for its banks without the EU bailout scheme. <br /><br />So, since the EU proposed that the Cyprus banks tax their depositors to partly compensate and qualify for the bailout scheme, does it not mean that there are large amount of CASH readily available in the banks, immediate or not, which would prevent the banks from collapsing, so why would such an "end-of-the-road" claim being made that the banks and the entire sovereign will collapse without the EU bailout, regardless of how the bailout scheme will be finally constructed (i.e. by taxing the banks depositors or any other austerity-prone measures)? In other words, what has originally gone wrong in the Cypriots banks that gotten the country into this mess?Anonymoushttps://www.blogger.com/profile/12383106945596722414noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-52308728985757175952013-03-22T11:27:00.816+00:002013-03-22T11:27:00.816+00:00So RBS, Lloyds/HBOS will ALWAYS be "Too Big T...So RBS, Lloyds/HBOS will ALWAYS be "Too Big To Fail" then? How do we remove that moral hazard?JP Coetzeehttps://www.blogger.com/profile/16986379260228726795noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-49709016240624604492013-03-22T11:07:12.300+00:002013-03-22T11:07:12.300+00:00I would close the bust banks, and pay out the depo...I would close the bust banks, and pay out the depositors in the only currency I have - Cypriot government bonds. <br /><br />Similarly I would recapitalise the banks using Cypriot government bonds, with a view to privatising the new bank in due course<br /><br />Then let the ECB refuse to accept Cypriot government bonds as ELA collateral. NeilWhttps://www.blogger.com/profile/11565959939525324309noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-72787095661979642092013-03-21T23:09:31.779+00:002013-03-21T23:09:31.779+00:00Richard, Thanks for the explanations, while I can ...Richard, Thanks for the explanations, while I can understand the implications for crashing HBO and RBS at the time,in my view and with the actuals events, it appears that the Governement and BOE took the "slow motion" collapse's route... That we want it or not it seems we are at a cross road... to quote Roger Waters (it's a miracle) " By the grace of the allmighty and the pressure of the market place, the human race has (started) civilized itself!" (at last!)Justathoughtnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-9316729991887571732013-03-21T22:18:16.672+00:002013-03-21T22:18:16.672+00:00The main problem in the UK during 2007/08 was the ...The main problem in the UK during 2007/08 was the law. Forced conversions to equity for bondholders would have been the ideal solution to prevent the Treasury becoming an equity holder. That would have forced a huge haircut on bondholders and kept RBS and HBOS solvent without recourse to taxpayer funds. Some people deny they were insolvent and claim government overreaction to supposed undercapitalisation caused the very undercapitalisation that required the injection of taxpayer capital. Basically they believe illiquidity events were allowed to spiral into capital problems because of the inadequacy of the BoE, and the misdiagnosis from the Bank to the Treasury. <br /><br />The problem that is often implicitly ignored in hindsight analysis, is there was no legal means at the time to convert bondholders against their will. The law was very much on the bondholders side and the senior bondholders were legally first in the queue. Therefore, "they should just have let the banks fail" notion implicitly assumes a normal bankruptcy scenario. Even with the government paying out quickly on deposit insurance, a quarter of all UK salaries at the time were being processed by the RBS group. a third of all daily UK electronic payments. Just think the chaos that would have ensued as hundreds of thousands of businesses had their money stuck behind bondholder for years as liquidation proceeded, with no guarantee that they would get it all back. I don't see anyway that letting RBS go into bankruptcy with the law as it stood at the time would not have collapsed hundreds of thousands of unrelated firms. The economy did go down but the UK economy would have suffered an unprecedented collapse.<br /><br />We will never prevent banks getting into trouble because of the nature of borrowing short and lending long. Nor should that be the overriding aim of regulation. A good resolution system when they do screw up that protects the economy and does not rely on taxpayer funds should be the aim. That simply did not exist in 2008. Richardhttps://www.blogger.com/profile/07937606253138392580noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-79132050078393220812013-03-21T21:03:55.279+00:002013-03-21T21:03:55.279+00:00Payments systems are a bit of a mystery to most pe...Payments systems are a bit of a mystery to most people. They are the "plumbing" that we don't see. Even if you work in a bank you may not be aware of how payments systems function. For my sins, I've actually worked on payments systems though I wouldn't call myself an expert - but a good friend of mine is an expert and I pick his brains from time to time. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-79816320678954237932013-03-21T20:30:50.375+00:002013-03-21T20:30:50.375+00:00Thanks a mil...Frances, I was not aware of this an...Thanks a mil...Frances, I was not aware of this and could you believe I worked for some years with ING bank however at my disacharge as a Building Project Engineer...Justathoughtnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-64759905030182097642013-03-21T19:52:03.804+00:002013-03-21T19:52:03.804+00:00In the UK the ATM network is run by the banks them...In the UK the ATM network is run by the banks themselves, so a major bank failure is likely to bring down the entire network. Other payments systems such as BACS, CHAPS, VISA are separate companies, but the banks are the gateway. A major bank failure causes gridlock in the payment systems themselves in much the same way that closure of a major airport causes gridlock in the air traffic system - payments in transit have to be returned or diverted, new payments have to be stopped and there can be liquidity problems in the payments systems themselves (sort of analagous to diverted aircraft running out of fuel). Central banks can ease the liquidity problems but they can't do anything about the payments chaos, which is seriously detrimental to the economy as I'm sure you can imagine. It doesn't matter that the payments companies are private - the same gridlock would still happen if it was a nationalised network. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-87793170581023866562013-03-21T19:41:15.405+00:002013-03-21T19:41:15.405+00:00Sorry Frances, I always thought that the retail pa...Sorry Frances, I always thought that the retail part of banks were acting or should have behave like utilities companies (connected to an interdependent "grid")especially for payments systems obviously I was under an erroneous supposition.Justathoughtnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-58957132911921438512013-03-21T19:04:00.680+00:002013-03-21T19:04:00.680+00:00In my view Northern Rock, Bradford & Bingley a...In my view Northern Rock, Bradford & Bingley and Dunfermline Building Society all should have been allowed to fail, salvageable assets sold and the depositors reimbursed. But the problem with RBS and Lloyds/HBOS is their importance to the payments system. Just imagine banks closed, ATMs broken, electronic payments not made, wages not paid, cards being declined. We had that for 3 hours recently when RBS had a systems failure, and it caused problems for lots of people. If RBS or Lloyds had been allowed to fail, it would have been the same thing but on a massive scale and for days or weeks on end. Believe me, we don't want to go there. And we did come dangerously close to it in 2008 - we were about half an hour away from ATM closures when RBS failed. The emergency bailout of RBS prevented a catastrophic economic crash - it would have been worse than that experienced by the US, since RBS is a retail bank whereas Lehman was an investment bank. Possible losses for depositors is the LEAST of the problems with a bank failure on the scale of RBS. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-163089329868351892013-03-21T18:54:38.287+00:002013-03-21T18:54:38.287+00:00Hi Frances, I wonder what could have been the cost...Hi Frances, I wonder what could have been the cost to let the banks such as RBS and co to crash and reimbourse the depositors, isn't UK also have a "insurance"?? I was definitively not a supporter of banking rescue however with your post in mind, at least maybe some lights are appearing and indeed it is no longer a Eurozone or even a European Union crisis....Justathoughtnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-9518265998126562802013-03-21T16:47:21.562+00:002013-03-21T16:47:21.562+00:00It probably isn't clear from the post, but I a...It probably isn't clear from the post, but I actually have some sympathy for the German position. Deposit insurance with no banking union and no fiscal conditions would effectively mean a never-ending German gravy train for weak banks. But it does mean there is no backstop for those weak banks, so small depositors are at risk.<br /><br />I don't agree with you that the problem is Cyprus's attempt to salvage its financial industry. Everyone knows it is toast. The real problem is Russia, which has made it very clear that it would not take kindly to being forced to play UK to Cyprus's Iceland in order to protect German taxpayers. Given Russia's control of energy supplies in the region, upsetting Russia is really not a clever thing to do. Putin doesn't play nice. <br /><br />This is no longer a Eurozone crisis, or even a European Union crisis.Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-28738010650723383302013-03-21T11:59:26.326+00:002013-03-21T11:59:26.326+00:00I believe you have misunderstood the German positi...I believe you have misunderstood the German position. I think the mainstream German view (at the politicians level at least, SPD and CDU) is that full banking union including an ECB deposit guarantee (or common bonds, similarly) goes with federal institutions that essentially have the matching tax-rising powers and distribution channels, and political accountability (a eurozone parliament, or an enlarged role for the existing one, or the like). The problem here is that takes years, and at the moment the largest obstacle for this are probably the French who're still on some silly sovereignty trip (and incidentally we'll get Brits trying to sabotage any further European integration even for things they don't take part in, which slows things down).<br /><br />That is in an emergency, which Cyprus is not (yet), they could relent and allow ECB to backstop deposit before the Brits are finished with torpedoing the federal work. Angela Merkel is anything but flexible, she changes views nearly as often as she changes her outfit's colour (and is universally both mocked and loved for it).<br /><br />On the Cyprus can't pay the deposit guarantee issue, it's not so clear to me. They only need the 30 billion if 100% of deposits go away and 100% of the assets are illiquid. An Icelandic solution -- put the best 30B of assets opposite the 30B of deposits truncated at 100K in a good bank, with branches etc, all the rest in a bad bank -- would probably work, and the ECB would probably be OK to ELA match the entire 30B worth of mundane assets in the unlikely event of a 100% deposit flight. Here the stumbling block seem to be Cypriot MPs who seem to hang on the hilarious idea that they still have a financial industry worth saving.<br /><br />Otherwise the best solution I've seen so far is the Lee Buchheit one: http://ssrn.com/abstract=2235359 (which is sort of a hybrid between the depositor tax and the Icelandic one).cighttp://commentisglee.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-70086038505275064482013-03-21T11:27:27.304+00:002013-03-21T11:27:27.304+00:00This is a fair point, but I don't think a prob...This is a fair point, but I don't think a problematic one. In some countries you already pay for your current account. Running a few computers and admin besides is not expensive. Besides if people dislike being charged directly for custody, you can put the charge on the transactions in and out. It may be hard to sustain things like free ATM withdrawals but then they're already subsidised where they are free (ATMs are never free to operate).cighttp://commentisglee.wordpress.com/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-60445653931510157132013-03-21T11:17:51.297+00:002013-03-21T11:17:51.297+00:00Thanks Frances for a clear and easy to understand ...Thanks Frances for a clear and easy to understand explanation of the situation. As you say, the relevant authorities should be honest about their inability to protect deposits, but I guess many folk wouldn't have left their money in the accounts had they been fully forewarned. Do you see a significant knock-on effect from the fallout from this crisis?Davideo Kiddhttps://www.blogger.com/profile/07678438666136766263noreply@blogger.com